The assets considered here are publicly traded instruments of investment like stocks and their portfolios. It can be shown that asset prices are linear polynomials of four basic factors - asset volumes, index price, index volume and time and hence their returns are rational functions and do not add linearly in a portfolio, especially when the returns are averaged out over multiple time intervals. However, for time series data observed on single time interval basis, returns may be treated as 'approximately' linear and modeled directly through multiple regression using two or more of the four basic variables mentioned above, depending upon the market being studied. As a result, the returns obtained from this Rational Function Model (RFM) are more accurate than those obtained from the existing models.
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